TAXATION IN BRAZIL
BRAZIL NEEDS A NEW TAX SYSTEM
Brazilian society shows signs of deep dissatisfaction with its tax system128. It is one of the most complexes in the world, having reached an advanced stage of deterioration, irrationality, inefficiency, and inequity.129
In mid-2001, Brazil’s tax legislation consisted of 55,767 articles, 33,374 paragraphs, 23,497 sub-paragraphs, and 9,956 headings. This tax law miscellany is housed in 18,589 pages of texts, decrees, codes, and notices.130 These figures, however, need to be updated each day. Every year nearly 300 new laws are drafted on the subject – roughly 1.23 alterations per business day.
In less than three years, between May 1995 and December 1998, legislation related to two federal taxes (the Income Tax (IR) and the Industrialized Products Tax (IPI)), one state tax (Circulation Tax on Goods and Services (ICMS)), and two Social Contributions (Social Integration Program (PIS) and Social Security Contribution (Cofins)) increased in the following manner:
• On the IR: 24 laws, 76 provisional measures, 14 decrees, 46 notices, and 149 rulings;
• On the IPI: 8 laws, 41 provisional measures, 20 decrees, 67 notices, and 87 rulings;
• On the ICMS: 24 laws, 165 notices, 314 resolutions and conventions;
• On the PIS: 1 Constitutional Amendment, 7 laws, 122 provisional measures, 1 decree, 3 resolutions, 8 rulings, 3 notices, 1 court order, and 1 legal opinion;
• On the Cofins: 2 supplemental laws, 3 laws, 30 provisional measures, 1
127 On the Single Tax and on the controversy that surrounds it, with arguments for and against that proposal, see [CINTRA, 1994(a)]. For an explanation of the proposal, see, especially [CINTRA, 1994 (c)] pp.85-89 and [CINTRA, 1994(b)] pp.203-245.
128 For a concise description of the main institutional characteristics of the Brazilian tax system see [SECRETARIA DA RECEITA FEDERAL, 2002(b)].
129 Instead of the famous maxim: “a good tax is an old tax”, Everardo Maciel suggests that “a good tax is a simple tax”. [MACIEL, 2001] .
130 The Congressional Investigative Commission on Tax Evasion stated that in Brazil “there is an excessive number of taxes, which are imposed through legislation that is extremely complex, unconstitutional, inconsistent, inadequate, of dubious interpretation and application, subject to constant modifications… to the extent that in 1990 1,062 fiscal rulings were issued, an average of 4.6 per business day. This legislation requires 33 accounting books, 24 tax forms, in addition to 25 basic labor and social security obligations.” See [CONGRESSO NACIONAL, 1994].
decree, 1 notice, 1 court order, and 1 ruling.131
A recent study done by the Instituto Brasileiro de Planejamento Tributário (Brazilian Institute for Tax Planning) estimated that between October 1988, when the new Brazilian Constitution was promulgated, and October 2008, over 240,000 pieces of tax regulation and legislative acts were issued, which amounts to 34 pieces of legislation issued each day since 1988, including week ends and holidays.132
Such complexity, typical of declaratory taxes is not unique to Brazil. In the United States heated debate has been waging over changes in that country’s main source of revenue, the income tax. Current US federal tax law is contained in no less than 45,662 pages, a number which has grown by 74% since 1984. Between 1990 and 2000, the number of tax forms increased by 23%%. The eight largest tax-consulting firms experienced sales increases of 112% between 1996 and 2001. The American “tax industry” currently employs over 1 million people, more than the entire automotive industry. US taxpayers spend US$ 183 billion annually in compliance costs alone (filling out forms and returns).133
In Brazil, the excessive number of taxes has directly contributed to record increases in revenue, year after year. TABLE 16 shows the growth of the tax burden in Brazil.
Some argue that the tax burden, as a percentage of Brazil’s GDP, could increase, considering that in several developed countries they are still higher.
However, such an opinion is nonsensical if taken as an isolated statement. A country’s tax burden can only be appraised considering, comparatively, its per capita income levels and its stage of development.
131 [REZENDE].
132 [AMARAL et alii ].
133 [EDWARDS, 2001].
TABLE 16
Total and per capita tax burdens Brazil (1993–2008) Year GDP per capita
(R$)
Per capita tax burden (R$)
Tax burden (% GDP)
1993 91.55 23.16 25.3
1994 2,232.32 622.82 27.9
1995 4,441.49 1,261.38 28.4
1996 5,231.52 1,496.22 28.6
1997 5,734.20 1,639.98 28.6
1998 5,890.31 1,725.86 29.3
1999 6,310.98 1,962.71 31.1
2000 6,886.28 2,093.43 30.4
2001 7,491.21 2,389.69 31.9
2002 8,378.10 2,706.13 32.3
2003 9,497.70 3,029.76 31.9
2004 10,691.89 3,506.94 32.8
2005 11,658.10 3,882.15 33.3
2006 12,688.28 4,250.57 33.5
2007 13,719.65 4,772.70 34.8
2008 15,155.15 5,446.17 35.9
Sources: Institute of Applied Economic Research (IPEA) and Federal Revenue Agency.
TABLE 17 shows the tax burden in selected countries. Brazil carries a tax burden that is incompatible with the per capita income level of the population. All countries bearing a tax burden near or higher than 30% of GDP have per capita annual income of US$ 40,000 or more. It is worth noting that countries with per capita income of less than US$ 10,000 per year have tax burdens of less than 25% of GDP. Brazil (and Uruguay in this sample of countries) is a clear example of extravagant over taxation.
Brazilian consumers bear high indirect taxes built into prices of products and services. According to ABIA [Brazilian Food Industry Association], taxes account for up to 34.7% of the final price of food. Internationally, the average is 7%. TABLE 18 illustrates the abusive taxation of consumer goods in Brazil, which results in low purchasing power of wages and in loss of competitiveness of Brazilian products in foreign markets. Most taxes on domestic production are not exonerated at the time of export, making exported goods and services carry heavy tax loads built into their prices (tax export).
In order to defend themselves from such an abusive tax burden, taxpayers practice evasion as a dodge necessary for survival. Tax avoidance has become a behavioral rule for Brazilian taxpayers, to the point of being called a “national
religion”.134
TABLE 17
Tax burden and per capita income in selected countries
Countries
In 1999, the Secretary of the Federal Revenue, Everardo Maciel, testified before the CPI [Parliamentary Investigative Commission] on the Financial System. His statement caused a strong impact on public opinion. The country was officially informed that large-scale tax evasion, tax avoidance, and other forms of tax hiding were common practices. According to his testimony, R$ 825 billion, almost one year of Brazil’s GDP, slipped through the fingers of the Federal Revenue without a cent
134 [MONTORO FILHO, 1994]. Even countries that have strong tax traditions, such as the USA, are suffering from corrosion of their ethical principles. Lester Thurrow, of MIT, stated, “tens of billions of dollars in interest and dividends are not reported on US tax forms... the corruption is now spreading to payroll employees... these people eventually begin to see themselves as “suckers” paying what others should be paying... It is only a matter of time until the tax system collapses. (…) In fact, the recently revealed cases of WordCom and Enron testify to the fragility of the US tax system. The consequence of this is that the inevitable taxation ends up falling to those least capable of resisting, such as wage earners.” (Quoted in [MILLS, 1990] pp. 43-44).
of it being collected, except for a small amount of revenue collected by the CPMF (a turnover bank transactions contribution). He stated, furthermore, that half of Brazil’s 530 largest corporations had not been paying income tax, and 42% of the 66 largest banks had accomplished the same feat.
Tax evasion is a deadly tumor to be extirpated from the nation’s tax system. The prevalence of this anomaly is responsible for deep tax injustices. According to the proceedings of the CPI [Parliamentary Investigative Commission] on Tax Evasion,
“tax evasion is entrenched in the population, in taxpayers, due to an educational and moral problem.”135
The Federal Revenue has been cross-referencing bank transaction data with filed income tax returns. The data reveal that billions of reais circulate free from the reach of the income tax.
TABLE 18
Percent of taxes on consumer prices
Product
Current tax as a percentage of consumer price
(%)
Kilogram of meat 47
Dozen eggs 29
Bread 43
Soft drink 37
Tea 50
Automobile 46
Tennis shoes 47
Pair of shoes 47
Television 49
Gasoline 53
Soybean oil 25
Tires 37
Men’s pants 25
Refrigerator 49
Source: Trevisan e Associados, Sindicom and ACSP.
In 1999, cross-referenced data uncovered taxpayers who claimed to be exempt
135 [CONGRESSO NACIONAL, 1994]
or economically inactive, and firms registered under the Simple [simplified tax procedures for micro and small firms], but whose bank transactions, surprisingly, amounted to approximately half of Brazil’s GDP, as shown in TABLE 19. It is worth noting that 559,161 individuals and firms transacted a total amount of R$ 116.9 billion, a monthly average of R$ 9.74 billion, while “claiming” to be exempt from income tax (of those, 424,435 individuals and firms that transacted R$ 77,736 billion were suspected of evasion, as seen in TABLE 19).
The data also revealed that 254 individuals and firms transacted the overwhelming amount of R$ 164.1 billion without paying income tax. On average, each one transacted R$ 54 million per month, but claimed to be exempt, inactive, registered under the Simple [simplified method of tax calculation used for small and micro firms], or were outright omissive. The analysis concluded that in 1999, 512,117 individuals and companies transacted R$ 465.5 billion, or R$ 38.8 billion per month, without reporting such payments to tax authorities. Implicitly, such transactions represented evaded earnings estimated at R$ 339.2 billion, or R$ 28.3 billion per month. In other words, transactions equivalent to approximately 32% of GDP evaded Brazil’s income tax.
Tax avoidance makes the current pattern of tax incidence on production so chaotic, unpredictable, and devastating that it can bankrupt an efficient taxpaying company. On the other hand, it can enable an inefficient tax-evading producer to survive, by looting its competitors in the marketplace.
TABLE 19
Taxpayers that are exempt, inactive, non-registered, and micro or small firms:
Value of bank transactions cross-referenced with income tax returns Estimate tax evasion
Source: Data from the Federal Revenue Agency (1999).
(*) Annual bank transactions greater than R$ 100,000 for individuals and firms, and greater than R$ 1 million for micro and small firms.
(**) Calculated as the average bank transaction figures for each category divided by the ratio of bank transactions/income, as indicated below:
Up to 10,000 = 10; from 10,000 to 100,000 = 5; from 100,000 to 500,000 = 3; from 500,000 to 1 million = 2.5;
from 1 million to 10 million = 2; from 10 million to 100 million = 1.5; and + than 100 million = 1.
According to surveys, 40% of Brazil’s income are not reported to tax authorities due to evasion or to escaping into the underground economy. This figure implies that the current tax burden of 38% of GDP is borne by 60% of potential taxpayers; in other words, those that pay bear a tax burden of almost 65% of their taxable income, while evaders contribute little to society, or much less than they should.136
Furthermore, tax evasion has an inevitable consequence: corruption. In Brazil, tax avoidance and evasion are accepted as normal facts of life, and are often praised as signs of courage and boldness in market behavior. Collusion between tax evaders and corrupt tax officials has been a cause of severe deterioration of ethical and moral standards of Brazilian society.
But it is on labor income that Brazilian tax burden sets a dreary record.
The combination of widespread tax evasion and the need for increased public revenue has turned payroll employees into one of the most heavily burdened subjects of taxation. Because of greater difficulties in practicing evasion or avoidance, regularly hired payroll employees are easy prey to escalating taxation. Additionally, the government has overburdened employers with extremely high fiscal and social security obligations.
Labor income in Brazil, which accounts for only 26.8% of domestic income, bears the burden – directly and indirectly – of approximately 53.5% of the country’s tax revenue. This provides clear indication that, in order to compensate for revenue lost to evasion, the government transfers the tax burden to those for whom tax evasion is all but impossible, namely, payroll employees. Data from both the US Internal Revenue Service and the Federal Revenue show that in the United States the individual income tax rate increases from 15% to 19% as taxable wage income reaches R$ 119,200 annually. In Brazil, the same rate increase is triggered when taxable income reaches R$ 15,200 per year.
This fact contributes significantly to current high unemployment rates.
Furthermore, the high cost of hiring and maintaining payroll employees is one of the key causes of the growth of the informal economy. Half of Brazil’s workers are not formal payroll employees.
Another characteristic of the Brazilian tax system is its regressiveness. In fact, ex post the system taxes more heavily those with lower income, although statutory taxes are usually progressive in their formal mechanisms of tax collection. For example, the income tax is progressive ex ante, but becomes regressive ex post after evasion and all deductions and allowances are duly accounted for. On the whole, the Brazilian tax system is regressive, as found in a recent study that showed that the tax burden for families earning up to two monthly minimum salaries is 48.8%, while it falls consistently across higher income brackets until it reaches a tax burden of
136 It is implicit in this argument that taxpayers can be separated into two groups: those who pay taxes and those who pay nothing, or less than they should. See [ZOCKUN, 1999].
26.3% for families earning more than thirty monthly minimum salaries.137
These facts demonstrate the urgent need for tax reform in Brazil. This is a debt contracted by government and by politicians with regard to Brazilian society during the last decade of the 20th century, and still left unpaid. Despite various attempts, tax reform never happened. The debate was intense; at times, even passionate. But it was never carried out.
It is no simple task to accommodate the specific interests of the vast number of social groups involved in a tax reform. These groups include workers, business men, and government agents, which are further divided by sectors and geographical areas, often with conflicting interests. Each group envisions in tax reform an opportunity to broaden its own economic space. Such conflicting interests cannot be resolved by conventional tax reform, as past experience has shown.
The Single Tax proposal for a tax reform, as will be shown ahead, by allowing gains to all parties involved – the public sector, payroll employees, and business owners – creates favorable conditions for a productive discussion. For the public sector, the Single Tax allows for reduced costs, for dismantling of unnecessary bureaucracy, for administrative modernization, for recovering evaded revenue, and for a lower public deficit; for workers, it allows for wage increases through the transfer to personal earnings of part of the social security contributions and payroll withholdings. For business owners, it allows for reduced costs, for larger markets, and for higher profits and investments.
Antonio Ermírio de Moraes, head of the largest industrial group in Brazil, stated in a published interview that he had engaged his entire legal and tax departments to analyze the Single Tax and the bank transaction tax, concluding that it is evasion-proof.138With a Single Tax, only tax evaders and the underground economy stand to lose, but this would be a welcome act of Justice, long overdue.
ROBERTO CAMPOS: THE CHOICE BETWEEN “INNOVATIVE